As China Piles on Debt, Consumers Seek a Piece of the Action

Customers at a car dealership in Qiqihar, China. Car loans are one of the ways that Chinese consumers are rapidly increasing their debt, a shift for a country accustomed to buying with cash.Credit
Gilles Sabrie for The New York Times

QIQIHAR, China — Over the past eight years, to the world’s growing alarm, China’s big state-owned companies and powerful local governments have borrowed trillions of dollars to get what they want.

Now, it’s Li Jing’s turn.

Ms. Li, a 33-year-old car saleswoman here in the middle of China’s declining industrial zone, is one of the growing millions of Chinese using mortgages and credit cards to finance a middle-class lifestyle. Over the past two years, she and her husband have bought and remodeled a $120,000 apartment and purchased two new cars for $30,000 apiece.

To help pay for it all, they took out a 10-year mortgage that absorbs nearly a third of their monthly income — once considered an unusual amount of debt in a country that used to depend almost solely on cash.

“I view the mortgage as a form of savings,” Ms. Li said, “because in 10 years, I’ll own the whole apartment.”

Standard & Poor’s on Thursday became the latest voice to warn that China, which has the world’s second-largest economy after the United States, has piled on too much debt and done it too quickly. The steep increase has the potential to destabilize the country’s financial system, the ratings agency warned, which could hurt the prospects of a country that has been the single biggest driver of global growth for a decade.

While critics have focused on borrowing by local governments and companies, China’s consumers — once famous for saving rather than spending — are also quickly taking on debt.

Chinese central bank data shows that consumer loans have grown almost 50 percent since the start of last year, when the government began encouraging more lending to households. That lending could grow considerably higher: The International Monetary Fund said it expected China’s household debt as a percentage of its economic output to double by 2022 compared with a decade before.

Chinese leaders envision their citizens with better access to mortgages, credit cards and other ways to enhance their purchasing power.Credit
Gilles Sabrie for The New York Times

Home mortgages represent a majority of China’s new household loans by value, adding to a surge in real estate prices. Car loans have been growing even faster in percentage terms. And credit card debt is now rising in a country that is otherwise dependent on cash or online transactions.

There are signs that China is moving on the fringes to contain mortgage lending, in part to tame housing costs. In the past week, banks in Beijing began raising mortgage interest rates. In a lengthening list of China’s largest cities, banks are under instructions to discourage the use of personal loans for real estate speculation. Six large cities established new home sales restrictions in recent days to cool off prices.

Surging property prices have helped keep consumer spending high even as China’s growth has slowed, giving its economy a lift. But more debt may not spur more growth — and could pinch the household finances of some.

“China will get less of a kick out of consumer debt in the coming 18 months than it did in the past 18 months,” said Louis Kuijs, an economist with Oxford Economics, a British research firm.

Some economists also worry that consumer loans may be a backdoor way for bloated companies to maintain or even expand their capacity. China’s domestic automakers — many of which are state owned and suffer from too many underused factories — have unleashed a blizzard of zero-interest car loans in the past two years, often through their own financing subsidiaries. In that time, the majority of Chinese consumers began to pay for cars with credit instead of cash, according to J. D. Power and Associates, a global consulting firm.

To be clear, most economists consider China’s consumer credit splurge to be a good thing. Chinese families are nowhere near the borrowing levels of spendthrift Americans, whose household debt is equal to more than three-quarters of the annual economic output of the United States. In China, that measure is still less than half.

More Loans Than Growth

Household debt is still lower in China compared to the size of the economy than in many countries, but home mortgages, car loans and credit card debt are also growing a lot faster than the Chinese economy now.

Household debt as a share of G.D.P.

100

%

Britain

U.S.

75

Japan

Germany

50

China

25

0

’11

’12

’13

’14

’15

’16

SEPT. 25, 2017

By The New York Times | Source: Bank of International Settlements

Chinese leaders envision a time when their country, like the United States, derives a major chunk of its economic growth from people buying homes, cars and appliances. To do that, Chinese households need better access to mortgages, credit cards and other ways to enhance their purchasing power.

Traditionally, China’s state-controlled banking system focused on lending money to big state-owned companies. Economists view household lending as an appealing alternative to having banks shovel more money into unprofitable, debt-ridden state firms that cannot be closed because they provide jobs to millions of workers.

So far, consumer lending has helped Chinese consumers weather the gradual slowdown in the country’s economic growth in recent years. That is particularly true in places like Qiqihar, a city of five million in the northeastern province of Heilongjiang. The local economy took a hit last year when a large steel mill closed a big blast furnace and overstaffed communal- and state-owned enterprises pushed out more than 40,000 workers.

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But even here, 500 miles north of China’s border with North Korea, the local economy seems to be rebounding from a slump two years ago, when the national economy was looking shaky. Walk out the front door of the recently completed high-speed rail station in Qiqihar and no fewer than 45 cranes are visible, erecting apartment towers and office buildings. The city’s economy grew at an annual rate of 6.4 percent in the first half of this year, up from 5.6 percent in the same period last year and nearly matching the national growth rate of 6.9 percent thus far this year.

Borrowing has been a big help, residents say. Whereas apartments once sold for cash only, many people now offer down payments of between 20 percent and 30 percent and take out mortgages for the rest.

“Certainly more people tend to borrow when purchasing apartments,” said Fu Shiqiang, a real estate agent. “They may want to get a bigger apartment or do business.”

Zhao Ying, another property agent, said he used a credit card at supermarkets and shopping malls and bought a $21,000 Toyota Vios sedan last year with a zero-interest loan. He said he had bought his current apartment with cash but would do things differently next time.

“I will definitely get a mortgage,” Mr. Zhao said. “It is very convenient, and I could use the leftover money to do some business or investment.”

Ms. Li, the car saleswoman, and her husband built their wealth the traditional way. They bought an inexpensive, two-bedroom apartment in 2003 when they married. Her husband was given a small apartment by his employer. They bought a third apartment as an investment.

Real estate prices have surged since then, and Ms. Li and her husband have cashed in. They sold all three units and bought a spacious, three-bedroom apartment for themselves and spent $30,000 to remodel it. They also bought a Volkswagen Tiguan and a Honda Accord.

Their mortgage helps support that lifestyle. Ms. Li, who said nearly a third of her customers buy with credit, knows that they are not alone.

“When I got my first car in 2006, almost no one in my local community had one,” Ms. Li said. “Now the roads are packed, and it’s really hard to find a place to park.”

A version of this article appears in print on September 26, 2017, on Page B8 of the New York edition with the headline: Chinese Consumers See Debt as a Ticket to the Middle Class. Order Reprints|Today's Paper|Subscribe